Don't Predict, Prepare

Austin Koplan, CPA

According to the National Bureau of Economic Research (NBER), the private, nonpartisan organization that decides when the United States is in a recession, the United States has had 13 recessions since 1945. The average duration of these recessions has been around 10 months, equivalent to one every 6 years. This compares to an average expansionary cycle of 64 months. In other words, the economy has been expanding 86% of the time since 1945 and in a recession only 14% of the time. Yet, we are constantly inundated with calls for the next recession. Why?

One reason is likely due to the extended expansionary period we have lived through since 2009. From 2010 through today, we have only experienced a two-month recession. That means the economy has been expanding in 99% of all months since the Great Financial Crisis. While this is unlikely to continue in perpetuity, expansion in and of itself is not a reason for a recession. Past recessions were caused by a global pandemic, a subprime mortgage crisis, Y2K fears spurring massive overinvestment, the Gulf War doubling oil prices and forcing interest rates higher, and the 1970s oil embargo that quadrupled oil prices and saw inflation hit 22% by the 1980s. The point being, recessions are typically brought on by outside forces and often outlier events, not the economy performing too well, unemployment being too low, or all-time high stock prices.

The only recession prediction that is guaranteed to come true is that a recession will happen in the future. The motives of anyone claiming to know when it will occur, what will cause it, the impact it will have, or how long it will last should likely be questioned. This goes for people of all educational backgrounds or previous business success.

In October of 2022, Bloomberg Economics issued a 100% probability of a recession in the next year. This marked the bottom in the stock market and the economy expanded rapidly. In June 2022, Jamie Dimon, CEO of JPMorgan Chase, warned consumers to brace themselves for an economic hurricane. In November 2022, Jeff Bezos, former CEO of Amazon urged consumers and businesses to reduce risk in the face of an impending recession. Elon Musk, CEO of Tesla, in October of 2022 predicted a global recession could last until the spring of 2024. In August of this year, a poll reported that 59% of Americans wrongly believe that the US is currently in a recession.

Will there be people that get these outcomes correct? Yes. Will you be able to know who they are, the timing of when they will be proven right, or correctly predict the second order effects? Unlikely. So, if we can’t predict the timing or impact of the next recession, is there nothing we can do? Not exactly.

In a 2018 blog post, Morgan Housel, author of “The Psychology of Money”, reflected on predictions in wake of the ten-year anniversary of the Great Financial Crisis,

Two things happen to predictions after you get hit with something big and unexpected:

• You extrapolate what just happened but happening with even greater force and consequence.
• You forecast with great conviction, despite the original event being improbable and something few, if anyone, predicted.

Timing and understanding the impact of a recession beforehand is almost impossible, managing your reaction to the unexpected is not. Knowing what you own and why you own it, having a diversified portfolio of assets that can weather any environment, and maintaining a liquid portfolio of assets to draw upon when needed are all activities that can be managed prior to a recession and before the heightened emotions of an unknown environment take hold. Will these steps prevent any drawdowns in your portfolio? No. Will they allow you to continue focusing on your goals and reduce the risk of a permanent impairment of capital? Yes.

With the market reaching new all-time highs this year, every past recession has looked like an opportunity and every future recession looks like a risk. Taking the time now to understand your financial position could protect you from falling victim to predictions.

^{The opinions expressed are those of PYAW’s Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed.} 

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